review of agriculture

The Dragon and the Elephant: Learning from

Agricultural and Rural Reforms in China and India
Shenggen Fan, Ashok Gulati

What can we learn from the process of economic

reform in China and India? Does the sequencing of
reform and an agriculture-led package matter? What
could other developing countries and countries in
economic transition learn from the experiences of India
and China? What could these two countries learn from
their own as well as each others experiences? How
can the two largest developing countries cooperate
in their agricultural and economic development
and work together at multilateral negotiations,
such as those conducted through the World Trade
Organisation, to address the concerns of developing
countries? This paper summarises the key findings
of a number of studies that were prepared for two
international conferences devoted to comparing the
rural development and agricultural reform experiences
of China (the dragon) and India (the elephant) over the
last several decades.

oday, China and India together account for 40 per cent of

the worlds population. Both have implemented a series of
economic reforms in the past two and half decades: China
initiated this process at the end of the 1970s, while India began in
the early 1990s.

1Introduction
The reforms in both India and China have led to rapid economic
growth, with growth rates touching 9-10 per cent per annum in
China and 8-9 per cent per annum in India in recent years. Despite similar trends in the growth rates, the two countries have
taken different reform paths; China started off with reforms in the
agriculture sector and in rural areas, while India started by liberalising and reforming the manufacturing sector. These differences
have led to different growth rates and, more importantly, different
rates of poverty reduction. They also have fundamentally different
implications for growth and poverty reduction in the future.
What can we learn from the process of economic reform in
these two countries? Does the sequencing of reform and an
agriculture-led package matter? What could other developing
countries and countries in economic transition learn from the
experiences of India and China? What could these two countries
learn from their own as well as each others experiences? How
can the two largest developing countries cooperate in their
agricultural and economic development and work together at
multilateral negotiations, such as those conducted through the
World Trade Organisation (WTO), to address the concerns of
developing countries?
This paper summarises the key findings of a number of studies
that were prepared for two international conferences devoted to
comparing the rural development and agricultural reform experiences of China (the dragon) and India (the elephant) over the last
several decades.1 These are as follows:

2Agricultural Reforms for Poverty Reduction

Shenggen Fan (s.fan@cgiar.org) is with the Development Strategy and

Governance Division, International Food Policy Research Institute,
Washington DC, United States, and Ashok Gulati (a.gulati@cgiar.org)
is the Asia director of the International Food Policy Research Institute,
New Delhi.
Economic & Political Weekly EPW june 28, 2008

From the trend growth rates of agriculture and the incidence of

poverty in the pre- and post-reform periods in China, it is clear
that the acceleration in agricultural growth during 1978-2002 (4.6
per cent a year as opposed to 2.5 per cent a year over 1966-77) was
the primary factor influencing the sharp drop in poverty, from 33
per cent of the population in 1978 to 3 per cent in 2001 [NBS 2002].
The better part of this decline occurred in the first reform phase of
1978-84 when agricultural gross domestic product (GDP) jumped
to 7.1 per cent a year and rural poverty dropped from 33 per cent
to 15 per cent. In India, the most rapid poverty reduction occurred

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review of agriculture

from late 1960s and the late 1980s. This is the period of the socalled green revolution and agricultural growth was high due to
the use of modern technologies and the strong policy support to
agriculture. In contrast, agriculture was not a major factor behind
poverty reduction during the era of reforms. In fact, farm growth
fluctuated and remained around the same levels of the 1980s, if
not marginally lower. During 1991-2003 agricultural GDP grew at
2.7 per cent a year compared to 2.9 per cent a year between 1980
and 1990 [GoI, Economic Survey]. Agricultural growth did rise
immediately after reforms began in 1991, at 4.1 per cent a year till
1997 before dipping again to 2 per cent. However, this higher
growth of six years did not have a noticeable impact on rural poverty, which reduced only slightly from 37.4 per cent in 1990-91 to
35.7 per cent in 1997. That is partly because, rather than through
reforms that directly affect the farm sector, agriculture growth was
induced in India primarily by interventions outside agriculture, including currency depreciation and reduction of protection in industry,
leading to an improvement of the terms of trade for agriculture.
Figure 1: GDP Growth in China and India
Index (1951-52=100, India; 1952=100, China)
4500
4000

enterprises (SOEs). Reforms of the SOEs in turn triggered macroeconomic reforms, opening up the economy further.
A comfortable domestic food supply situation achieved through
the various incentive reforms ensured a critical level of grain production before liberalisation could begin and allowed Chinese policy
makers to abandon the old agricultural policy framework geared
towards self-sufficiency in foodgrains. The procurement system
was dismantled everywhere except for the main grain-producing
regions and the food rationing system was abolished in the early
1990s. As a result, private agricultural trade is now flourishing.
In India, reforms were actually prompted by macro imbalances
and thus started with macroeconomic and non-agricultural reforms.
These led to impressive rates of economic growth in the 1990s but,
being limited to the non-agricultural sectors, did not have as signi
ficant an impact on poverty as in the case of China. Policy changes
related to agriculture were carried out much later, and even then
were only partial. India still continues with state food procurement
and distribution, mainly because it is seen as affirmative action for
over two-thirds of the population, including the poorest, who are
dependent on agriculture and the rural economy, for livelihood.

3Gradual and Careful Reforms

The Chinese policymakers first created the incentives and institutions required by the market economy and then, in the mid-1980s,
they began to slowly open up markets, by withdrawing central
1000
planning and reducing the scope of procurement while expanding
0
1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003
the role of private trade and markets. Studies show that the impact
Sources: Calculations for China are based on data from National Bureau of Statistics (NBS) 2003;
on growth from incentive reforms of land use rights, agricultural
Calculations for India are based on India, CSO 2004 and India, RBI 2003.
production management through the household responsibility sysFigure 2: Growth in Agricultural Output and Productivity in China and India
tem (HRS), and rising procure(a) Agricultural output
(b) Total Factor Productivity
ment prices during 1978-84
Ag GDP Index (base=1952)
TFP Index (base=1970)
1400
was larger than from market
250
1400
1200
1200
China
liberalisation reforms after 1984
200
1000
1000
[Fan 1991; Lin 1991]. This was
China
150
800
800
because incentive reforms in
600
600
India
100
China aided the gradual emerIndia
400
400
gence of markets which kept
50
200
200
at bay the negative effects of
0
0
0
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996
the sudden collapse of the old
Sources: (a) Authors calculations based on NBS (2002) and Indiastat data 2003;
central planning system in the
(b) China: Fan, Zhang and Zhang 2002. India: Fan, Hazell and Thorat 1999.
absence of market-based alBy making agriculture the starting point of market-oriented re- locative mechanisms, as experienced in other transitional countries.
forms, a sector which gave majority of the people their livelihood,
It is not that the Chinese policymakers had planned this
China could ensure a widespread distribution of gains and build sequence meticulously; rather, it evolved out of a trial and error
consensus and political support for the continuation of reforms. approach in implementing reforms. The adoption of new measures
Reform of incentives resulted in greater returns to the farmers and through experimentation rather than a predetermined blueprint
in more efficient resource allocation, which in turn strengthened increased the likelihood of the success of reforms since it implied
the domestic production base and made it more competitive. Be- a learning by doing approach or, in the words of Deng Xiaoping,
sides, prosperity in agriculture favoured the development of a one of crossing the river while feeling the rocks [Chow 2002].
dynamic rural non-farm (RNF) sector, regarded as one of the main This was peculiar to the Chinese reform process in which the
causes for rapid poverty reduction in China as it provided additional government made sure that each new policy was field-tested at
sources of income outside farming [Fan, Zhang and Zhang 2002]. length and determined to be successful in selected experimental
The rapid development of the RNF sector also encouraged the districts before it could be applied nationwide and the next measgovernment to expand the scope of policy changes and put pressure ure introduced [Chen, Wang and Davis 1999].
on the urban economy to reform as well, since non-farm enterprises
In the case of India, agricultural trade reforms were a point of
in rural areas had become more competitive than the state-owned departure in agricultural policy. It can be argued that this sequence
3000
2000

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China

India

june 28, 2008 EPW Economic & Political Weekly

review of agriculture

was a natural choice for India since the incentive structure of

Indian agriculture was highly distorted at the outset of reforms;
the sector was, and still is, burdened with excessive regulations
on private trading and most market activities. There is significant
potential for growth only if these constraints are removed.
In the case of India, liberalisation of agricultural trade policies
happened to create a series of imbalances by preceding incentive
and market reforms in the domestic arena. Lowered protection
against a backdrop of low international prices increased imports,
although in the case of wheat there was already excess supply
from domestic production induced by a high minimum support
price (MSP). While broad-based economic and trade reforms resulted in the new export orientation of the sector and improved
the incentive framework of agriculture, they also left the sector
more exposed to international competition because of persisting
constraints to productivity improvement in the domestic front.2
As a result, India is now attempting marketing reforms and
removal of regulatory constraints at least in some of the states by
amending Agriculture Produce Marketing Committee Act, although Essential Commodities Act still remains in place.

4Importance of Initial Conditions

In 1970 the likelihood of an Indian child dying before the fifth
birthday was twice that of her Chinese counterpart. Life expectancy
was 49 years in India against Chinas 62 years, and 70 per cent of
the Indian rural population was illiterate as opposed to 49 per cent
of rural Chinese [WDI 2006]. One important reason for Chinas
edge over India in health and education is the collective system
where the government provided these basic amenities free. Rural
electrification had made headway in the pre-reform years as rural
electricity consumption grew at a rate of 27 per cent a year over
1953-80 as opposed to 10 per cent a year over 1980-90 and govern
ment investment in power grew at 27 per cent a year during
1953-78 [Fan, Zhang and Zhang 2002]. The egalitarian access to land
was ensured by the land distribution and tenure system which also
performed a crucial welfare function by limiting the number of the
landless, providing the bulk of the rural population with subsistence and helping to distribute widely the benefits from agricultural price and market reform. The resultant improvement in efficiency and productivity were major triggers in poverty reduction.
In India on the other hand, land reforms to make the agrarian
structure more equitable were not as successful and left a relatively
larger number of landless agricultural labourers exposed to the harsh
impact of unemployment and underemployment. In the power sector
too, although public investments were substantial, annual growth
of 12 per cent during 1981-90 [Fan, Gulati and Thorat 2007] was
not as high as in China and thus rural electrification and even establishment of telecommunication connection proceeded more
slowly in the Indian villages. This slow pace severely affected the
growth of agro-processing and cold storage in the rural non-farm
sector. The levels of processing remain abysmal even now, with over
20 per cent of fruit and vegetables produced going waste, and the
government is currently designing policies to encourage this sector.
Thus, the relatively more favourable initial conditions in China
help to explain why, despite the private and economic restrictions
imposed on the Chinese rural population, the country could
Economic & Political Weekly EPW june 28, 2008

achieve a sustained growth even before the reforms [NBS 2003].3

However, China could not fully realise the benefits from the
available physical and social infrastructure in the pre-reform
period because of lack of incentives under the commune system.
Once economic reforms were introduced, they released the latent
energy in the system, resulting in a very high growth rate and
rapid reduction in poverty after the 1970s [Rao 2003].
Both countries recorded a slowdown in meeting their health and
education goals after reforms began. In India, this was primarily
due to the fiscal discipline imposed by the macroeconomic crisis,
while market-oriented reforms in China introduced the concept
of profit in the management of social services. In China, this
implied progressive privatisation of supply agencies, decline in
government subsidies, and increase in education and health
costs, which caused school dropouts and rising health vulnerability.
In devising mechanisms to address the risks involved in increased
privatisation of social services, China could perhaps learn from
Indias long experience of a vast system of government safety nets
and welfare programmes for the rural population.
With regard to land, both countries have high populationland ratios but distribution is less skewed in China than in India
and landlessness is virtually absent. As in education and health,
equal access to land was a product of the egalitarianism inherent
in the collective era that played a vital role in minimising risks
and ensuring the availability of minimum subsistence. In India,
replication of the Chinese agrarian system is not politically feasible, so marginal and landless farmers will require a strong
social protection system through well-targeted social security
and employment policies. Effective social protection measures
will also be required in China where land distribution is likely
to become skewed and more concentrated following the
adoption of the new agricultural lease law that enables farmers
to transfer lease rights.
Both China and India are characterised by the predominance of
small farms (below two hectares) more so in China which has
implications for rural employment. Chinas experience shows that
small farms support more intensive use of family labour resources,
while in India, owners of holdings above two hectares, who account for less than 20 per cent of total landholdings but over 60
per cent of cultivated area, often lack the incentive to practise
labour-intensive cultivation. Therefore, reforms are required to
optimise land use and eliminate distortions such as concealed
tenancy in Indian land markets. Land leasing is restricted affecting
private investment as well as the scope for consolidation into larger
and more efficient operational holdings [Landes and Gulati 2003].
However, given the high population-land ratio, approach to de
regulation is naturally cautious, allowing for a minimum set of
safeguards (for example, liberalising leasing within ceilings) to
prevent absentee landlordism and increase in landlessness.

5 Public Investments
In China, the correlation between the initial conditions and postreform achievements in poverty reduction and growth makes a
convincing case for stepping up government investments in rural
infrastructure and social services. In India, on the other hand,
the decline in rural public investment as a result of fiscal profligacy

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and rising subsidies on fertilisers, power, water and price support

is regarded as a primary cause of slower growth after 1997. Since
both these countries have budget pressures and are unlikely to be
able to raise public investments significantly, they would just have
to invest available resources more efficiently. Returns to public
investments vary drastically across different types of investment
and regions even within the same country. This implies a great
potential for achieving more growth and less poverty even with
the same amount of investment, assuming public resources can be
allocated optimally on the basis of reliable information on the
marginal returns of different government spending. Studies have
found that spending on agricultural research, education, and
rural roads is the most effective for promoting agricultural growth
and poverty reduction [Fan, Gulati and Thorat 2007].
Then again, both countries will find it tough to expand
cultivable land and water resources, so yield-based farm growth
will become important and will call for increased agricultural
research and technology development. Agricultural research and
development (R&D) takes place in both public and private sectors,
but managing public versus private R&D can be tricky. China promoted the development of the public business sector through
commercialisation of technologies by public research institutes
but this often led to duplication of research and overlap of efforts
with SOEs. The Chinese experience can provide valuable lessons
in this sector for other countries in transition.
The improved intellectual property right (IPR) regime under
WTO stimulated private research and patenting activity in both
countries [Pal 2004]. However, weak implementation of IPR in the
two countries and high costs of maintaining patents in China are
obstacles to the entry of private players. The Chinese experience
also shows that protection of plant varieties can help improve
resource generation by the poorer public research institutes as the
number of IPR applications filed was effectively higher for
resource-poor institutions than for better-funded national institutes.
In terms of increasing the scope for private research, Indias
case indicate that the IPR regime is more effective if complemented by favourable policies in the area of tax, investment and
input imports (ibid).
Private agricultural R&D provides both opportunities and
challenges. Significant opportunities can arise for public-private
partnerships in the areas of funding, research and extension.
However policymakers need to be aware that the private sector
tends to privilege higher-value crops and concentrate in areas
where agriculture is already advanced. Given agriculture R&Ds
potential to reduce poverty in marginal regions, public research
spending should target poorer farmers in less favoured environments like Indias semi-arid tropics and rainfed areas and Chinas
poor western regions.

Water Management and Conservation

In the water sector, government spending in irrigation effectively
promoted growth and poverty reduction, but the marginal
returns of such spending has come down over time. Indeed, studies have shown that investments in rainfed areas have had high
marginal returns for agricultural growth and poverty reduction.
Major investments in harvesting rainwater through watersheds,

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through public-private partnerships, may help usher in a multicoloured revolution (not just a green one) in agriculture.
In both countries, water use efficiency can be vastly improved
through institutional and management reforms of existing water
systems. Indias experience with water users associations (WUA)
in some states, participatory watershed schemes and communitybased rain harvesting can provide good learning experience.
Transfer of management to user groups was more successful in
India, although the coverage of irrigated areas by these user
associations remains low in India compared to other south-east
Asian countries [Rao 2002]. Insufficient administrative and
political will to devolve management powers to the local WUAs
and inadequate infrastructure for building capacity inhibited
the involvement of farmers in India [Rao 2000]. On the other
hand, the Chinese experience shows that reforms aimed at
giving incentives to irrigation systems managers to improve useefficiency had a positive effect on crop yields, groundwater table
and cereal production [Wang et al 2003]. The question is
whether the strategy of transforming water bureaucrats into
managers is possible in India.
Providing right incentives to farmers is crucial to promoting
water saving. Low water prices and profligate power subsidies for
operating tubewells have encouraged wasteful use of water and
depletion of groundwater resources. Ambiguous water use rights
following de-collectivisation in China, and laws linking water
rights to land ownership in India also led to inefficiencies. These
included the emergence of unfair water markets over time, where
rich landholders with modern water extraction technology profited from selling water to poorer cultivators.
Increase in water use charges may not be feasible in the short
to medium term without changes in the institutional set-up. In
India, irrigation is affected by realpolitik as free electricity for
pumping water is offered for political rent-seeking. In both countries, given the booming numbers of private tubewell owners and
weak institutions and infrastructure that make monitoring of
water withdrawals and revenue collection difficult,4 the impact
of reforms like withdrawal permit systems and volumetric charging can only be limited [Shah, Scott and Buechler 2004; Wang,
Huang and Rozelle 2003]. Improved crop yields can also lead to a
more efficient use of scarce water resources in agriculture. For
that, inputs other than water, such as credit and agricultural
research on water saving and yield-improving technologies, need
to be deployed. This is particularly true for India where both
irrigated and rainfed crop yields are lower than those in China.
In both countries, this may also call for trade and price policies
favourable to high-value, less water-intensive crops. In India,
technological innovations to improve yields seem more feasible
in the short and medium term than management reforms for improving water use efficiency, given the political and institutional
constraints [Rao 2002].

6Reform Incentives
Chinas experience with marketing reforms holds valuable lessons for other transition economies. Farm support policies lose
their rationale when there is oversupply of food and agricultural
trade is free and open. Indian MSPs and input subsidies were
june 28, 2008 EPW Economic & Political Weekly

review of agriculture

intended to encourage the adoption of new technologies and fuel

growth, turned into inefficient and costly income-support interventions, encouraging the build-up of vested interests because
they were not abolished after their aim was realised. China could
learn from this experience and seek to encourage agricultural
growth in the future, yet avoid the large inefficient Indian subsidies. This issue is important because India has recently introduced a costly direct transfer programme for rural areas and also
because of late, increasing government support to agriculture
and rural areas is finding many takers among scholars and
government officials alike.
Despite limited reforms in agricultural marketing in India, the
impact of policy changes has slowed down since state governments are reluctant to implement them [Landes and Gulati 2003].
In addition, a host of outdated domestic regulations, such as the
agricultural price marketing committee (APMC) acts, regulation of
agricultural produce market sale, restrictive land laws and licence
requirements on food processing units, continue to weaken the
environment for agribusiness and private sector involvement
in agricultural marketing that could boost employment and
efficiency. In the backdrop of increasing, diversified food demand
and opening up of agricultural trade, legal and regulatory reform
remains critical given its capacity to directly impact the sector
adjusting to the changing environment. Given that smallholder
agriculture is predominant in both countries, farmers could be
excessively penalised because they do not possess sufficient
capital and information to manage the risks inherent in agricultural activities. While China and India are reconsidering the current forms of agricultural and input subsidies, they should also put
in place well-targeted and innovative cost-effective crop insurance
policies to protect farmers vulnerable to drastic supply and price
shocks. Such shocks can only intensify as trade policies are further
liberalised. In India, the abolition of restrictions to trading on the
futures markets in major agricultural commodities is a step in this
direction, which needs to be further strengthened.
One other important area is the strengthening of the network
of support services to small farmers related to information, credit
and extension. The Indian experience shows that smallholder
agriculture needs strong institutional support in these areas to
grow and prosper.

Trade Liberalisation
With regard to broad trade liberalisation, both countries made
progress in reducing protection levels. Still, Indias weighted
average tariff at 29 per cent was double that of Chinas 16 per
cent [Ahluwalia 2002]. India was able to sustain its current
growth rate with lower foreign direct investment (FDI) inflows
and a relatively less export orientation than China. But if it has
to attain the target of 9 per cent GDP growth it needs to further
reform the FDI climate in view of its potential to transfer knowhow, managerial skills and new technologies. China can offer
valuable lessons in this area.
The inevitable restructuring and adjustments involved in
opening up agricultural trade flows will produce both winners
and losers. Domestic producers of crops in which the country
lacks comparative advantage (for example, edible oils in the case
Economic & Political Weekly EPW june 28, 2008

of India and wheat and maize for China) are likely to suffer increasingly from falling prices resulting from higher imports. They
will also be negatively affected when there is pressure on the
governments to reduce support to inefficient national producers.
Broad-based structural adjustments in the economy may depress
rural income, increase opportunities in manufacturing as well as
services primarily located in urban areas, and widen rural-urban
inequality. These inter-sectoral adjustments will progressively
shrink the size of the primary sector, which will release additional unskilled labour into the labour markets.
The rural population will gain if it is able to shift to more profitable off-farm occupations. Here, investment in rural education
can help farmers move out of traditional occupations. It will also
be important to increase investments in rural R&D and infrastructure to enhance productivity. These investments fall under the
WTO green box and are therefore exempted from reduction
commitments, although their positive impact will be realised
over the longer run. On the positive side, WTO membership can
provide the much-needed external pressure to improve efficiency
and implement reforms in tradable inputs such as seeds, fertilisers, farm machinery and pesticides, where markets are inefficient
either due to government intervention or lack of infrastructure. It
can also highlight the facilitating role of the government in the
provision of services like information, marketing facilities, technical assistance, and standards and quality control regulations.
Lastly, WTO also offers an opportunity to join hands and create a
third force of countries besides the giants European Union (EU)
and the US in negotiations during the Doha round.

7 Promoting Rural Diversification

A major shift in farm production towards non-foodgrain products
like livestock, fishery and horticulture has been well under way
in India and China since the 1980s. In China, achievement of food
self-sufficiency and the extraordinary growth in basic grain production by the late 1970s immensely helped diversification. This
is because food surpluses provided government with enough leeway to feed the increasing population and relax controls over the
foodgrain sector. China gradually abandoned the policies biased
in favour of rice and wheat, such as the food rationing system for
urban areas or the mandatory levy quotas, which encouraged
farmers to diversify production. Developing countries affected
by chronic food shortages can learn from this experience. In
contrast, steadily growing MSPs in India artificially raised production of major cereals discouraging diversification toward
non-grain commodities.
A comparison of the shares of government expenditure to the
pace of growth in output in different agricultural sub-sectors indicate that despite high growth, some high value products (like
livestock and horticulture) are under-funded relative to traditional food crops [Pal 2004]. Policymakers must encourage
higher investment in research to boost yields and expand cultivation given the export potential of these crops, positive impact on
smallholders, and growing domestic demand.
Post-reforms, rising per capita income influencing food consumption patterns has been a major driver for diversification into
non-food crops. Without vertical integration between production,

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processing and marketing that is, between plate and plough

the potential for growth inherent in the diversification process
may remain under-exploited. Vertical integration reduces risks
by providing assured markets, cuts transactions costs, and helps
improve quality standards and food safety. In both countries,
new and innovative institutional arrangements have emerged,
promoting the development of new products, and these need to
be strengthened. Indias successful experiments with contract
farming, which helped cut risk, promote production and export
of high-value foods, and raise income and employment of smallholders, can be valuable for China. On the other hand, the experience of growth in the retail food chains and supermarkets in
China in recent years could benefit India where restrictions on
FDI and infrastructure bottlenecks are limiting progress.

Inadequacies
In smallholder dominated farming, diversification has important
implications for poverty reduction. The labour-intensive nature of
the production of high-value products is not only well suited to the
small farm economy but there is also great potential for employment creation in agro-processing and retail chains. Strengthening
vertical integration through innovative institutional arrangements
without tackling the other major obstacles faced by the small
farmers would not be effective in reducing poverty. In fact, Indias
case shows how institutional deficiencies like weak enforcement
of contracts and high transaction costs faced by small cultivators
often prompt agro-firms to deal directly with large farmers.
Acceleration of diversification in favour of small farmers is also
hindered by lack of access to markets, technology and information, poor rural infrastructure and inadequate marketing facilities.
Future reforms need to address these issues through increased investments in basic rural infrastructure and marketing facilities like
cold storage chains. Lastly, small cultivators often lack sufficient
marketable surplus. Nor can they raise production at will due to
their lack of access to technology and financial services. Welltargeted government support services are needed in credit markets
and extension services designed specifically for smallholders.

Rural Non-Farm Sector

Looking away from crops, as the Chinese experience has amply
demonstrated, the evolution of a dynamic rural non-farm sector
offers great potential for rural diversification. Rapid growth of
rural enterprises in China is one of the most striking differentiators
between the reform processes of the two countries, especially as
township and village enterprises (TVEs) provided increasing jobs
outside agriculture, by diversifying and expanding the sources of
household income. Agricultural growth and favourable demand
conditions were critical to development of the RNF sector in China
because post-1978, reforms triggered a surge in demand from
prospering rural areas for TVE products. TVEs also benefited from
the close connection with dynamic urban markets established
since the early stages of their development. The connection with
urban markets brought TVEs in competition with SOEs and stimulated the latter to increase productivity and unit scale [ILO 1998].
In India, however, farm output growth rates decelerated, dampening demand as well as farm and non-farm employment.

142

Indias non-farm economy produces low-profit services of the

informal sector primarily for the rural markets and is dominated
by tiny own-account family-operated units. These are characterised by low productivity brought about by poor technological
base and by policies aimed at protecting rural employment by
reserving certain activities for small units. Limited growth of RNF
job opportunities is also related to the poorly educated rural
labour force. This is a challenge that will increasingly confront
both countries as they adjust to greater market and trade liberalisation leading to economic restructuring and the replacement of
traditional and low-productivity jobs by new and more productive occupations requiring more educated labourers. Thus spending on rural education will be crucial.
The role of non-farm employment is expected to become increasingly significant as the average size of farms get smaller.
Small farms may be efficient in terms of land productivity but not
in labour productivity, which is more closely linked to farmers
income. Greater off-farm opportunities and migration to urban
areas is required to increase average farm size, labour producti
vity and farmers income.

8Anti-Poverty Programmes
The role of anti-poverty programmes (APPs) and safety nets in
poverty alleviation came into sharp focus in the 1990s to address
the negative impact of liberal policies on income distribution.
The need for fiscal stabilisation in India meant the reduction in
transfers to the states and in capital expenditures on rural infrastructure [Jha 2000], to counterbalance which the government
stepped up funding for several existing anti-poverty programmes
and created new ones. In China, the government was strongly
committed to addressing the poverty problem, and government
initiatives, as announced in official plans and government conferences starting in the mid-1990s, were revived.
Poverty funds and programmes have documented shortfalls
and inefficiencies in terms of targeting and cost-effectiveness,
but their significant contribution to limiting the severity and the
extent of poverty is inescapable. There are still more than 400
million rural poor in India and China, based on the international
standard of one dollar a day (more than 100 million in China
and more than 300 million in India). In China, the bulk of the
rural poor are primarily in the remote, mountainous or naturalresource poor western provinces. In India, they are concentrated
in the eastern (Bihar, Orissa and West Bengal), central (Madhya
Pradesh) and northern (Uttar Pradesh) states where rural
poverty is higher than the all-India average of 27 per cent as
of 2004-05.
Radical redistributive measures like land reforms are relatively
impractical in India due to their potential for social conflict, while
public investments take a long time to translate into employment
and economic growth. Compared to these, APPs are a more agile
instrument in the short run, provided their shortcomings are
removed.5 Poor design, targeting, implementation and fund misuse are key causes of ineffective poverty programmes. To improve
targeting, one lesson that China may draw from the experience
of India is in the use of a greater variety of targeted programmes
directed to specific sections of the poor as opposed to its own
june 28, 2008 EPW Economic & Political Weekly

review of agriculture

traditional, broader income or area-based approaches. Selfselection schemes like rural public works and plans targeting
women, children and the elderly are more pro-poor since identification of the beneficiaries are easier, faster and less costly.
To strengthen the impact of APPs, decentralised and participatory approaches are more effective than top-down strategies as
they involve a greater variety of agents (non-governmental
organisations (NGOs), civil society, and international aid organisations) in the fight against poverty besides the government.
India is a good point of reference in this respect since extensive
participation of panchayats and civil society at various stages of
the formulation and implementation of the programmes ensures
the tailoring of programmes to local needs, thereby improving
their impact and effectiveness.

9Institutions and Regulatory Environment

In both countries there was political will to carry out reforms, but
in practice outcomes were shaped by the different patterns of
governance. India is a debating society where political differences are expressed freely. Policymaking is exposed to the pressure
of various interest groups and there are long debates before
decisions are taken. The lengthy bureaucratic procedures,
intended to ensure checks and balances in the system, often delays decision-making and implementation. This exercise is compatible with the needs of a free and dynamic polity but in practice
is a key reason for Indias slow pace of economic reforms.
China, on the other hand, is a mobilising society where decisions are taken faster and state power is backed by mass mobilisation. As a result, implementation of decisions is more effective
although the lack of more elaborate debate in China on major
reforms can sometimes lead to disastrous actions, as with the
Great Leap Forward in 1958, and the Cultural Revolution of
1966-76. Interestingly, as the economic system opens up further
and prosperity increases, it will become harder and harder to
reconcile the centralised political set-up with the more liberal
economic system. Indeed, this is one of the most important
challenges before China today.
However, in China, the ideology-induced commitment to build
an equitable society in the pre-reform years created a strong
political will to provide the population with near-universal access to
basic health and education services, while the administrative
set-up of the communes proved an effective mechanism of resource
mobilisation and service delivery. Although similar administrative
machinery is not replicable in the Indian context, the country can
still try and strengthen the initial conditions in terms of rural
electrification, roads, access to education and health services etc.
A critical factor in explaining dissimilar reform outcomes between India and China is the difference at the level of reform implementation that is shaped by the institutional, regulatory and
political settings. Investments in rural infrastructure and other
key public services are crucial, but it is equally critical to develop
suitable institutional arrangements for their delivery. Major failures in public provision notwithstanding, the government continues to be the major supplier of infrastructure services in both
countries. Input suppliers like the state electricity boards (SEBs)
in India and SOEs (including grain bureaus) in China do not function
Economic & Political Weekly EPW june 28, 2008

efficiently due to the lack of transparency and accountability. As

against the requirement of a 3 per cent return on investment
(RoI), SEBs have recorded negative RoIs since 1981. By 2000-01,
their returns were a negative 27 per cent after subsidies [Gulati
and Narayanan 2003]. In the case of power and water, underpricing of user fees do not allow recovery of costs even to meet
costs of operation and maintenance and this leads to deteriorating quality of water and power services to farmers. Strengthening public institutions that provide public goods and services and
making them cost-efficient can lead to both fiscal sustainability
and long-term growth. These goals can be achieved in different
ways such as privatisation, unbundling, decentralisation and
contracting. Effective public institutions also require an adequate
supply of trained and motivated personnel and investments in
training to increase the supply.
Another reason for slower implementation of reforms in India
relates to the regulatory environment and the enforcement
bureaucracy. Although streamlining the regulatory apparatus
through de-licensing has begun, much inefficiency remains in
place. Several private investment decisions still require government
approval entailing long procedures encouraging corruption.
During the reform years China relaxed regulations on mobility
between rural and urban areas, which promoted the development of the non-farm sector and abetted economic migration.
Recently, it has also started to relax the complex system controlling broad-based personal mobility, removing state interference
in private life and creating a more mobile and open social environment in tune with the freer economic setting.6 One of the fallouts of these changes is the faster issue of passports and visas.
Finally, a key factor in the effective implementation of reforms in
China was the ability of the leadership to set both clear objectives
and time frame for transition to the reformed regime [Ahluwalia
2002], no doubt helped by the centralisation of decision-making
which minimises dissent. In the context of a highly pluralist society
like India, consent is more difficult to achieve, and so neither clear
objectives nor time frames for transition can be set. This has been
the case with, for instance, phasing out of subsidies, tariff reduction, price increases for economic services, etc. There is also a tendency towards populist policymaking in India, which is clear in the
case of subsidies which although acknowledged as inefficient and
iniquitous, have been tough to remove or minimise. This situation
slows the pace of change in the short and medium term. Although
democracy and participation have intrinsic value and are not mere
instruments of development, the role of democracy in enhancing
or hampering economic change and poverty reduction remains a
complex subject for development research. Comparisons of China
and India on these broad political matters may produce a fascinating set of insights in the coming years.

10Conclusions
A number of factors help to explain the differences in growth between the two countries during the reform era: initial conditions,
the sequencing and pace of reforms, and the political system, institutions, and regulatory environment. Yet special mention must
be made of the fact that China and India achieved remarkable
development and growth even as aid as a percentage of GDP in

143

review of agriculture

the two countries remained low. This is in direct contrast to most

other developing countries and regions, where aid is much higher
while development and poverty reduction lag far behind. This is
an important lesson for developing and developed countries,
multilateral agencies, and local NGOs and groups. It questions
the very basis of current policy prescriptions that accompany
aid packages, not only raising issues related to the efficiency
and effectiveness of external aid but also, conversely, revealing
the extraordinary and often underestimated capacity of
national initiatives and policy actions to turn and in fact halt
the tide of poverty.
Both countries still face tremendous challenges on the path to
further prosperity. Continued growth is a must, owing to pressure from a growing population and the need for jobs for them. It
is also a condition for a more stable society. Given the high expectation of their citizens, the lack of growth or even slower growth
could lead to unrest in both countries. The limited natural resource base can be a critical constraint to growth. The future economic growth of both countries increasingly depends on imports

Notes
1 These events, held in New Delhi and Beijing,
brought together many prominent Chinese and
Indian scholars and policymakers and were
organised by the International Food Policy Research
Institute in collaboration with the Jawaharlal
Nehru University, New Delhi, and the Chinese
Academy of Agricultural Sciences, Beijing.
2 See Elbehri, Hertel and Martin (2003) who provide a case study on the impacts of trade liberalisation in the cotton sector.
3 Between 1952 and 1977, Chinese agricultural GDP
increased at about 2.3 per cent a year.
4 There were near 20 million private tubewell
owners in India as on 2003 and 3.5 million in
China as on 1997.
5 Jha (2001) provides a comprehensive analysis of
the financial, regulatory and political ways to improve the effectiveness of poverty reduction programmes.
6 In recent years some cities including Beijing were
allowed to relax the danwei system of permits, a
government controlled work-unit to which urban
citizens had to apply for permission to get housing, wedding licence, passport, etc. The decline of
the danwei system is a consequence of the restructuring of the SOEs during the reform years.

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